DBRS Assigns Provisional Ratings to The Bancorp Commercial Mortgage 2018-CRE4 Trust

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of The Bancorp Commercial Mortgage 2018 CRE4 Trust, Commercial Mortgage Pass-Through Certificates, Series 2018-CRE4 to be issued by The Bancorp Commercial Mortgage 2018-CRE4 Trust (the Issuer):

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (sf)

All trends are Stable.

The collateral for the transaction consists of 45 recently originated floating-rate mortgages secured by 50 transitional commercial real estate properties totaling $341.0 million based on current trust cut-off balances ($515.2 million, including funded pari passu participation interests) and $568.8 million based on the fully funded loan amounts. The loans are secured by currently cash-flowing assets, some of which are in a period of transition, with plans to stabilize and improve the asset value. The floating-rate mortgages were analyzed to determine the probability of loan default over the term of the loan and its refinance risk at maturity based on a fully extended loan term. Because of the floating-rate nature of the loans, the index (one-month LIBOR) was applied at the lower of a DBRS stressed rate that corresponded to the remaining fully extended term of the loans and the strike price of the interest rate cap, with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the cut-off balances were measured against the DBRS In-Place Net Cash Flow (NCF) and their respective stressed constants, there were 44 loans, representing 95.6% of the pool, with term debt service coverage ratios (DSCRs) below 1.15 times (x), a threshold indicative of a higher likelihood of term default. Additionally, to assess refinance risk, DBRS applied its refinance constants to the balloon amounts, resulting in 36 loans, or 80.5% of the pool, having refinance DSCRs below 1.00x relative to the DBRS Stabilized NCF. The properties are frequently transitioning, with potential upside in the cash flow; however, DBRS does not give full credit to the stabilization if there are no holdbacks or if other loan structural features in place are insufficient to support such treatment. Furthermore, even with structural features provided, DBRS generally does not assume the assets will stabilize above market levels. The transaction is of a sequential-pay structure.

The loans are predominantly secured by traditional property types (i.e., multifamily, retail and office), with limited exposure to higher-volatility property types or those with short-term leases such as hotels or self-storage. Three loans, representing 7.8% of the pool, are secured by limited-service hotels, and there are no self-storage assets in the pool. Forty-one loans, totaling 93.6% of the deal balance, represent acquisition financing, with borrowers contributing cash equity to the transaction. The loans were all sourced by The Bancorp Bank, a commercial mortgage originator with strong origination practices. Bancorp is expected to purchase and retain 100.0% of the Class C certificates, accounting for approximately 7.5% of the total principal balance of the certificates. DBRS did not consider any of the loan sponsors to be Weak or Bad (Litigious) as a result of prior loan default, limited net worth and/or liquidity, a historical negative credit event and/or inadequate commercial real estate experience. The properties are located in primarily core (3.4% super-dense urban, 5.5% urban and 86.6% suburban) markets that benefit from greater liquidity. Only two loans, representing 4.5% of the pool, are located in tertiary markets, and no properties are located in rural markets. None of the loans in the pool are secured by student or military housing properties, which often exhibit higher cash flow volatility than traditional multifamily properties.

Unlike most commercial real estate collateralized loan obligation transactions where the issuer retains all below-investment-grade certificates, Bancorp will only be retaining the Class C Certificates, representing a 7.5% retained interest. The risk-retention role will be fulfilled by The Värde Mortgage Fund II (Master), L.P., an affiliate of Värde Partners, purchasing Class G-RR as a third-party purchaser, which will represent at least 5.0% of the initial principal balance of the certificates. Värde Partners is a large investment firm participating in a range of asset classes, including the commercial real estate sector as a direct lender on transitional properties. The pool is relatively concentrated based on loan size, as there are only 45 loans in the pool, and it has a concentration profile similar to a pool of 25 equally sized loans. The ten largest loans represent 49.0% of the pool, and the largest three loans represent 21.4% of the pool. Although the concentration profile is similar to a pool of 25 equally sized loans, which is typically worse than most fixed-rate conduit transactions, the concentration profile is similar or superior compared with many floating-rate transactions that generally have fewer than 30 loans and sometimes fewer than 20.

The pool is highly concentrated by property type, as 32 loans representing 78.8% of the pool are secured by multifamily properties. Multifamily properties are generally considered to be lower risk than commercial properties, such as office, retail and industrial, and far lower risk than hospitality properties. While cash flow volatility can be elevated due to the short-term nature of the underlying leases, loss severity for loans secured by multifamily properties is lower than that of most other property types. The loans have been analyzed by DBRS to a stabilized cash flow that is, in some instances, above the current in-place cash flow. There is a possibility that the sponsors will not execute their business plans as expected and the higher stabilized cash flow will not materialize during the loan term. Failure to execute the business plan could result in a term default or the inability to refinance the fully funded loan balance. DBRS made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be rational and the future funding amounts to be sufficient to execute such plans. In addition, DBRS models the probability of default based on the DBRS In-Place NCF and the fully funded loan amount (including the future funding participation structures).

The corresponding weighted-average (WA) DBRS Going-In Debt Yield is 6.3%, which is significantly lower than the WA DBRS Exit Debt Yield of 8.2% based on a DBRS Stabilized NCF. All loans have floating interest rates and are interest only during the original term, which is typically three years, creating interest rate risk. The borrowers of all loans have purchased interest rate caps to protect against a rise in interest rates over the term of the loan. The WA DBRS stressed interest rate for the pool is 3.076% higher than the pool’s WA interest rate. In order to qualify for extension options, the loans must meet minimum debt yield and loan-to-value requirements. All but one of the loans — 420 Taylor Street — amortize during the extension option, based on 25- and 30-year amortization schedules.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

For more information on this transaction and supporting data, please log into www.viewpoint.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS Viewpoint platform.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The principal methodology is the North American CMBS Multi-borrower Rating Methodology, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.